Boku — Consolidating the carrier billing market

On 17 June, Boku announced plans to acquire Fortumo, one of the three main competitors in the direct carrier billing (DCB) market.

Boku is acquiring Fortumo for a maximum enterprise value of $41m/£33m. The maximum consideration of $45m includes $4m of working capital and is made up of:

The company is funding this through an equity raise and debt. Boku placed 23.6m shares at 85p per share (7.1% discount to the closing price on 17 June) raising gross proceeds of £20.1m/$25.2m. In addition, the company has put in place a debt facility with Citibank for $20m/£15.9m, consisting of a $10m revolving credit facility and a $10m term loan. The loan has a four-year term, with $1.25m repaid each year and an interest rate of Libor + 2.5%.

The placing shares are expected to be admitted on 22 June. The acquisition is conditional on the shares being placed and the target date for completing the acquisition is 1 July (latest date 17 September).

Boku expects the deal to be immediately earnings accretive, before synergies.

Fortumo was founded in Estonia in 2007 and has been profitable since 2009. The company has 73 employees, most who are based in Estonia, with small regional offices in India, the US, Singapore, Vietnam and Indonesia. Fortumo has built up a network of 280 carrier connections in 80 countries, with the majority of merchants using its platform based in Europe and Asia. It has tended to focus on supporting small to medium-sized enterprises (c 400), although it does also work with large merchants such as Amazon, Google, Spotify and Tencent.

Its platform is typically used to buy the same kind of digital content as Boku’s: gaming, music, streaming video, apps. In addition, it supports merchants in the Nordic parking market and the digital publishing market.

The table below shows the company’s financial performance over the last three years.

Clearly, the business has shown strong revenue growth over the period and has more than doubled EBITDA margins over the same period. EBIT margins are very close to EBITDA margins, implying a historical low level of capitalised development costs. At the end of FY19, Fortumo had net assets of $8.7m and gross assets of $25.5m. The majority of merchants contract with Fortumo via the settlement model (c 90% of volume), while some of the larger merchants (Google, Amazon) contract via the transaction model.

The company has also disclosed Fortumo’s performance during Q120. As for Boku, Fortumo has seen increased demand from gaming during lockdown, countered by a delay in some deployments. According to management, Fortumo hit its Q120 targets, despite the disruption from COVID-19.

Management outlined the logic behind the deal:

Based on its own research, Boku estimates that it is the largest DCB provider, with TPV (total payment volume) of $5bn and Payments EBITDA margin of 31.6% in FY19 (excluding one-off revenue of $3.3m). It estimates that the next largest provider is DOCOMO Digital, a subsidiary of NTT DOCOMO, with TPV of c €3bn in the year ended 31 March 2019 (no profitability data are available for the Payments business, but the group reported an EBITDA margin below 10%). In third place by volume is Bango, with £1.1bn of end-user spend in CY19 generating £7.2m of Payments revenue (0.65% take rate). The company is just profitable at the group EBITDA level, although this is after investment in its data business. Smallest by TPV is Fortumo (we estimate c $180m in FY19), but with a higher take rate of c 4% and an EBITDA margin of 32.4%. Buying Fortumo provides Boku with access to the smaller end of the merchant market, where take rates are much higher – partly due to the reduced bargaining power compared to the likes of Google and Apple, but also because most merchants are using the settlement model.

Due to Fortumo’s high level of profitability, we estimate that the deal will be earnings accretive for FY20 and onwards. After factoring in the placing and acquisition (as of 1 July), our normalised diluted EPS forecasts increase by 2.1% for FY20, 0.8% for FY21 and 0.7% for FY22.

The company has no immediate plans to make cost savings but noted that Fortumo’s Estonian operations result in a lower cost base than Boku’s on a per head basis. In particular, development activities are based in Estonia, where the cost of developers can be as little as 20% of the cost of developers in the US. So, while we are not likely to see any immediate cuts to the cost base, future headcount increases are likely to be biased towards Estonia. For non-staff costs, Fortumo may be able to take advantage of Boku’s buying power.

Fortumo’s platform provides self-service capabilities for merchants resulting in a much lower onboarding cost. Boku has typically focused on fewer, much larger merchants who require customisation of the service in return for providing high transaction volumes. The combined entities will now be able to service all types of merchant efficiently.

In terms of operator relationships, Fortumo has better direct connections in some Asian countries, including Indonesia, Vietnam and Pakistan. On the other hand, in some countries it has connections via intermediaries where Boku has direct connections. There could be scope for both businesses to leverage the other’s connections.

Boku plans to keep Fortumo as a standalone business, retaining the current management team headed by Martin Koppel (CEO) and the brand.

Boku noted that there is limited customer overlap between the two businesses. The combined entity will encompass high-volume, large merchants mainly using the transaction model (and hence lower take rates) and small and medium-sized merchants, mostly using the settlement model (with higher take rates).

The earnout requires Fortumo to generate EBITDA of €4.3m in the 12 months to 30 June 2021 in order to receive the maximum $5.4m payout. EBITDA below €2m will result in no earnout being paid, and EBITDA in the range €2–4.3m will generate a payout on a sliding scale.

We have assumed that the acquisition completes on 1 July. We factor in revenue growth in the low to mid-teens for Fortumo with a gradually expanding EBITDA margin. We have also factored in an increase in capitalised development costs and related amortisation, and higher share-based payments. This results in enhanced EBITDA and operating margins in all forecast years, and we raise our normalised diluted EPS forecast by 2.1% in FY20, 0.8% in FY21 and 0.7% in FY22. Even with the debt taken on to fund the acquisition, we estimate that the company will maintain a growing net cash position over the forecast period.

The table below summarises the valuation of Fortumo, based on historic and forecast revenue and EBITDA. On a sales multiple, the price paid for Fortumo is in line with Boku’s valuation prior to the deal announcement. On an EV/EBITDA basis, Fortumo is valued at a discount to Boku, reflecting its higher profitability compared to Boku’s group profitability (which includes the loss-making Identity business).

The table below shows the new enlarged Boku group valuation versus Payment and Identity peers.

As we have done before, we look at the valuation on a sum-of-the-parts basis to reflect the different profiles of the Payments and Identity businesses. We use the peer group average EV/EBITDA multiple for FY21 (to reflect a full year ownership of Fortumo) for the Payments business. For Identity, we use the value of the acquisition of $25m; this is conservative compared to peer valuations but reflects the fact that the business is currently loss-making. This generates an equity value for the group of $432m or 123p per share, compared to the current share price of 100p. Excluding the Identity business entirely, the group would be worth $407m or 116p per share, still well ahead of the current share price. When we last wrote (10 June), we estimated a group per share value of 119p, and excluding Identity, 111p. A slight increase in the peer average EBITDA multiple combined with the higher EBITDA forecast for Boku in FY21 more than outweigh the cost of acquiring Fortumo.